Inflation inching up

For the first time in FY18 and only the second time in last four years, year-on-year inflation crossed 5 percent. June 2018 inflation numbers are out, and the signs of inflation having bottomed out are increasingly becoming evident. CPI for June 2018 was recorded at 5.21 percent, whereas the month-on-month change was recorded at 0.57 percent.

The average CPI for FY18 stood at 3.92 percent, well within the target and lower than 4.16 percent average CPI in FY17. But inflation has been motoring along of late, as evident by a 45 month high numbers. More importantly, core inflation was recorded at 7.1 percent in June 2018, crossing the 7 percent barrier for the third consecutive month – also recording a 45 month high.

Recall that the house rent index had gone up uncharacteristically by its standard in the last round of revision, the impacts of which were expected to be felt on the overall number. The month-on-month inflation is distributed between perishable food and transport prices. The rise in international oil prices has led to consecutive rounds of petroleum products’ prince increase – sending the transport sub-index north. The trickle down will soon start to show in prices of other products, as distribution gets costlier.

The looming possibility of a massive price revision in consumer gas prices is also near – and could lead to further increase in both utility and transport prices. Considerably expensive gas would mean higher cost of business, higher utility bills, and more expensive fuel for commuters. All this, while Pakistan is in dire need of more revenues and when the Petroleum Levy has more room to be increased , on need basis – should mean fuel related inflation would remain strong in the coming months.

Should Pakistan end up with the IMF post elections, it would not come easy. That may mean another round of tariff rationalization of electricity tariffs. A lot depends on the international commodity price cycle, which has shown no signs of softening anytime soon. Talking of softening, the monetary policy committee’s decision in the upcoming policy should be more straightforward – given expectations of continuation of inflation trends, the deficits, reserves and the dwindling currency.